Case study on how a combined household can reduce their total tax liability significantly by utilizing exemptions that SARS provides.

1. Think Efficient. Realise potential
Tax-effective structuring of an
investment portfolio
28 February 2018

2. 2
Tax evasion versus Tax avoidance
1) Evasion
Do not bank income from product sales.
Declare higher salaries and wages than what was really paid.
Criminal transgression that can lead to prosecution.
2) Avoidance
Declared income agrees with actual circumstances.
Use legal measures that SARS provides to avoid a high tax assessment.
Not an offense and an individual will not be prosecuted.

3. 3
Different stages of tax structuring
1) Pre-retirement
Combining different investment vehicles with different tax characteristics to
provide a tax-sheltered capital base in future.
Examples of these strategies include:
 Reduction of annual taxable income.
 Tax-free compound income, dividends and capital growth.
 Limiting future exposure to estate duty.
2) During retirement
Implementation of a dynamic income-withdrawal strategy to address
income needs from the most tax-exposed investments first and then
from less tax-exposed investments.
The ideal situation is to die with as little investments in your own estate
as possible.

4. 4
Case study
Mr Smith
(48 years old)
Mrs Smith
(46 years old)
 Engineer with his own
consultation company,
SmithCon (Pty) Ltd.
 He also has a
successful commercial
cattle farm in his own
name.
 Physiotherapist with her
own practice.
 She also handles all the
administrative issues of
the cattle farm (financial
statements, labour
issues, tax compliance, et
cetera).
Married outside community of property

5. 5
Case study
The Smiths currently have interests in the following investments (in
their own names and as beneficiaries of the Smith Family Trust):
Description Mr Smith Mrs Smith Smith F/T
Unit Trust R5,000,000 - R6,000,000
Cash in bank R100,000 R25,000 -
Pension fund R500,000 - -
Retirement annuity R250,000 - -
Total R5,850,000 R25,000 R6,000,000

6. 6
Case study
The Smiths and the Smith Family Trust’ gross income for the
2017/18 tax year is as follows:
Description Mr Smith Mrs Smith Smith F/T
Salary R1,000,000 - -
Net profit from practice - R100,000 -
Net profit from cattle farm R300,000 - -
Realised capital gains - Unit trust R200,000 - R150,000
Dividends received - SmithCon (Pty) Ltd R1,500,000
Dividends received - Unit trust R250,000 - R130,000
Interest received - Unit trust R150,000 - R220,000
Interest received - Bank account R7,000 R1,750 -
Total R3,407,000 R101,750 R500,000

7. 7
Case study
The Smiths and the Smith Family Trust’ tax liability for the
2017/18 tax year is as follows:
Description Mr Smith Mrs Smith Smith F/T
Taxable income before retirement funds R1,433,200 R100,000 R220,000
Contributions to pension fund (R100,000) - -
Contributions to retirement annuity (R25,000) - -
Taxable capital gains R80,000 - R120,000
Net taxable income R1,388,200 R100,000 R340,000
Tax payable R470,033 R4,365 R153,000
Effective tax rate 33.86% 4.37% 45.00%

8. 8
Case study
How can the Smiths restructure
their and the Smith Family Trust’
investments more effectively for
tax purposes?

9. 9
Case study
1) There is no donations tax applicable between spouses and
individuals younger than 65 can receive interest income of R23,800
tax free. Mr Smith can therefore donate R2,500,000 of his unit trust
and R37,500 of his cash in the bank to Mrs Smith to invest in her
own name.
2) Mr Smith can contribute 27.5% of his total taxable income to
retirement funds and receive it as a tax deduction (subject to a limit
of R350,000 per year). He currently only contributes approximately
9.0% of his total taxable income. He can therefore contribute
another R225,000 to his retirement annuity and receive a tax
deduction for it.
3) Mr Smith currently doesn’t pay a salary to Mrs Smith for the administrative
duties that she performs for the farming activities. He can start paying her a
market related salary of R15,000 per month (R180,000 per year) and claim
it as an expense against the farming income.

10. 10
Case study
4) If Mr Smith donates half of the unit trust investment as discussed earlier
and he pays her a salary of R180,000 per year she can also contribute
27.5% of her total taxable income to a retirement annuity (limited to
R350,000 per year).
5) The first R40,000 capital gains that an individual receives in a tax year is
exempt from capital gains tax. If Mr Smith donates half of the unit trust
investment as discussed earliers his taxable capital gains will reduce from
R160,000 to R60,000 and Mrs Smith will now also have taxable capital gains
of R60,000.
6) Mr and Mrs Smith can both contribute R33,000 per year to tax free savings
accounts. By contributing to these investments they will reduce their future
exposure to income tax, capital gains tax and dividend tax significantly.

11. 11
Case study
8) The Smith Family Trust unit trust of R6,000,000 can be liquidated and the
funds can be invested in a sinking fund. By doing this the income tax on
future income will be limited to 30% (currently 45%) and capital gains tax
on realised capital gains to 12% (currently 36%).
7) There is a general perception that dividend tax is only 20%. However, if it is
taken into account that dividends are declared from after-tax income the
effective combined tax rate for a company that declares dividends is
42.40% (28% + (20% of 72%)).
Up until a taxable income of R1,500,000 the marginal tax rate for
individuals is 41%. Any income that exceeds R1,500,000 will be taxed at
45%. Mr Smith must structure his salary and dividends from SmithCon (Pty)
Ltd in such a way that his combined tax rate is as low as possible.

12. 12
Case study
After all this restructuring, have
the Smiths’ overall tax situation
changed materially?

13. 13
Case study
The Smiths’ interests in their investments are now as follows:
Description Mr Smith Mrs Smith Smith F/T
Unit trust R2,500,000 R2,500,000 -
Sinking fund - - R6,000,000
Cash in bank R62,500 R62,500 -
Pension fund R500,000 - -
Retirement annuity R250,000 - -
Total R3,262,500 R2,562,500 R6,000,000

14. 14
Case study
The Smiths and Smith Family Trust’ gross income for the
2017/18 tax year is now as follows:
Description Mr Smith Mrs Smith Smith F/T
Salary R1,096,652 R180,000 -
Net profit from practice - R100,000 -
Net profit from farming activities R120,000 - -
Realised capital gains - Unit trust R100,000 R100,000 -
Realised capital gains - Sinking fund - - R150,000
Dividends received - SmithCon (Pty) Ltd R1,403,348 - -
Dividends received - Unit trust R75,000 R75,000 -
Dividends received - Sinking fund - - R130,000
Interest received - Unit trust R75,000 R75,000 -
Interest received - Cash in bank R4,875 R4,875 -
Interest received - Sinking fund - - R220,000
Total R2,874,875 R534,875 R500,000

15. 15
Case study
The Smiths and Smith Family Trust’ tax liability for the
2017/18 tax year is now as follows:
Description Mr Smith Mrs Smith Smith F/T
Taxable income before retirement funds
contributions R1,272,727 R336,075 R220,000
Contributions to pension fund (R100,000) - -
Contributions to retirement annuity (R250,000) (R92,421) -
Taxable income after retirement funds
contributions R922,727 R243,654 R220,000
Taxable capital gains R60,000 R60,000 R150,000
Net taxable income R982,727 R303,654 R370,000
Tax payable R303,789 R50,409 R84,000
Effective tax rate 23.87% 16.60% 22.70%The effective tax rate above is calculated by dividing the “Tax payable” by the “Taxable income after
retirement fund contributions”.

16. 16
Case study
Conclusion:
Description Mr Smith Mrs Smith Smith F/T
Total tax payable before restructuring R470,033 R4,365 R153,000
Total tax payable after restructuring (R303,789) (R50,409) (R84,000)
Total tax saving R166,244 (R46,044) R69,000
Retirement annuity value before
restructuring R250,000 -
Retirement annuity value after
restructuring R500,000 R92,421
Additional provision for retirement R250,000 R92,421The Smiths not only save net total tax of R120,200 for the tax year, but they have also invested an
additional 342,421 for retirement in their retirement annuities which makes the total benefit for the
year R462,621.
The Smith Family Trust saves total tax of R69,000 for the tax year.

17. 17
Case study
- Last thought - What was Mr and Mrs Smith’s guaranteed
returns on their retirement annuity contributions?
Description Mr Smith Mrs Smith
Gross contributions to retirement
annuities R250,000 R92,421
Marginal tax rate on income 41.00% 31.00%
Refund from SARS (R102,500) (R28,650)
Net contributions to retirement annuities R147,500 R63,770
Guaranteed returns 69.49% 44.93%

18. 18
Case study
- And eventually the Smiths can feel like this about SARS…

19. Contact me:
E: henri@efw.co.za
T: +27 (0)51 447 6094
S: +27 (0)79 515 2306
19
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